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Why Hershey Looks Like a Sweet Investment

Hershey's expansion and brand strength can help it benefit from a growing chocolate market despite competition from Nestle and Mondelez.

Chocolate is big business, and with the holiday season round the corner, now is the peak time for chocolate makers to make some good money. According to a survey of the National Confectioners Association, nearly 72% of all candy spending this Halloween was on chocolate and the same trend can be expected to continue in the holiday period.

The U.S. constitutes more than 86% of the North American chocolate market . Since The Hershey Company(NYSE:HSY) holds the largest chunk at 43.30% of the U.S. market, it is a good time to see how it is positioned going into the holidays. It competes with peers such as Mars/Wrigley, Nestle SA(OTC:NSRGY) and Mondelez International(NASDAQ:MDLZ) in the CMG (chocolate, mint and gum) category.

Hershey's growth prospects and Nestle's movesChocolate sells well even in tough economic conditions. For example, last year, more than $12.6 billion was spent on chocolate in the U.S, 3.8% more than the year before . This trend is reflected in the third-quarter results of Hershey's as well.

Hershey posted estimates-beating earnings of $1.04 per share, 2.9% higher than what analysts had estimated. This was a considerable 19.5% improvement versus the same period a year ago. Third quarter's revenue of $1.85 billion was 6.1% higher versus the same quarter a year-ago, driven by higher volumes.

Compared to Hershey, Nestle reported 4% growth . Despite a slowdown in the economies of Latin America, Nestle's Kit-Kat grew in double digits. The company is confident of delivering 5% organic growth for the full year.

It is expected that the global chocolate market will grow from $83.2 billion in 2010 to $98.3 billion in 2016 at an estimated CAGR of 2.7% . Asia will have a higher CAGR of 4.7%. Among the Asian nations, China is important, and so is India due to the increasing purchasing power of the ever-growing middle class. China's middle class is expected to grow to 340 million by 2016 and this represents huge potential going forward.

According to Natra, China has an annual chocolate consumption of 100 grams per person, compared to 8 kilos per person in Western Europe, but it is the sheer size of population that makes it an interesting and lucrative market. There's ample headroom for growth in consumption per person also.

Hershey launched the Lancaster brand of caramel candies in China in May and will be launching this in the U.S. in January 2014. This shows the importance that Hershey is attaching to the international market and China in particular. It has also announced that it will be building a $250 million plant in Malaysia, which is its largest investment in Asia ever .

This plant will provide easy distribution access to more than 25 markets across Asia. As already stated, the chocolate market in Asia is expected to grow at a brisk pace and is expected to account for 20% of the global market going forward. Hence, Hershey is looking to fortify its position here to benefit from the expected growth.

Going forward, Hershey aims to attain sales of $10 billion by 2017 , with 25% of revenue coming from the international markets. For this, it is willing to make acquisitions, apart from innovating new items to enhance its portfolio.

But Hershey's will have competition from Nestle, which has over 27 factories in the Greater China region and is known for the strong demand for its products in the country. Nestle holds the highest market share in infant formula in China, as in most of the emerging markets. Recently, it acquired a 60% stake in China's biggest confectioner , Hsu Fu Chi. In July, Nestle announced the opening of two more factories in China.

Mondelez joins the frayCompetition is expected to get stiffer with Mondelez, the maker of Cadbury and Oreo Cookies, also looking ambitiously at the Chinese market. In June, Mondelez invested approximately $85 million in the expansion of its plant in China. The company expects to increase investments by about $100 million this year, $200 million in 2014 and up to $300 million in 2015 and thereafter in emerging markets.

Also, Mondelez recently reaffirmed its expectation of delivering organic net revenue growth at the low end of its 5%-7% long-term target this year. As Mondelez continues to push in high-growth markets, it might be able to deliver higher growth rates.

Bottom lineHershey is the leading player in the North American chocolate market and the company is also looking to make a move in China. It might face competition from the likes of Nestle and Mondelez, but for investors looking for exposure to the chocolate market, Hershey's would be a good option.

Its strong brand, recent investments to tap growth in the Asian market, and a good dividend yield of 2% are some of the reasons why you should consider Hershey's for your portfolio.